RFP Template

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RFP Template

FINAL TRANSCRIPT
Canfor Corporation
Third Quarter Results
Event Date/Time: October 29, 2015 — 11:00 a.m. E.T.
Length: 22 minutes
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FINAL TRANSCRIPT
October 29, 2015 — 11:00 a.m. E.T.
Canfor Corporation Third Quarter Results
CORPORATE PARTICIPANTS
Don Kayne
Canfor Corporation — President and Chief Executive Officer
Alan Nicholl
Canfor Corporation — Senior Vice President, Finance and Chief Financial Officer
Brett Robinson
Canfor Corporation — President, Canfor Pulp Products Incorporated
Wayne Guthrie
Canfor Corporation — Senior Vice President, Sales and Marketing
CONFERENCE CALL PARTICIPANTS
Sean Steuart
TD Securities — Analyst
Paul Quinn
RBC Capital Markets — Analyst
Daryl Swetlishoff
Raymond James — Analyst
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PRESENTATION
Operator
Good morning, ladies and gentlemen. Welcome to the Canfor and Canfor Pulp Third Quarter
Analyst Call.
A recording and transcript of the call will be available on the Canfor and Canfor Pulp
websites.
During this call, Canfor and Canfor Pulp's chief financial officer will be referring to a slide
presentation that is available in the Investor Relations section of each company's website.
Also, the Companies would like to point out that this call will include forward-looking
statements, so please refer to the press releases for the associated risks of such statements.
I would now like to turn the meeting over to Mr. Don Kayne, Canfor and Canfor Pulp's Chief
Executive Officer. Please go ahead, Mr. Kayne.
Don Kayne — President and Chief Executive Officer, Canfor Corporation
Thank you, Operator, and good morning, everyone. And thank you for joining the Canfor
and Canfor Pulp Q3 2015 Results Conference Call. I will speak briefly to the results of both companies
before I turn things over to Alan Nicholl, who is the Chief Financial Officer for both Canfor Corporation
and Canfor Pulp Products Incorporated. Alan will provide a more detailed overview of our
performance in Q3, after which we will take some questions.
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On the line with me today to address your questions are Brett Robinson, President of Canfor
Pulp; Wayne Guthrie, our Senior Vice President of Sales and Marketing for Canfor; Stephen Mackie,
our Senior Vice President of Wood Products Operations Canada; and Peter Hart, our VP of Pulp Sales
Marketing.
Canfor reported shareholder net income after onetime items of $6 million or $0.05 a share.
On a similar basis, Canfor Pulp reported net income of $35 million or $0.50 a share, again after
onetime items. Over the quarter, we announced the permanent closure of our Canal Flats Sawmill
due to a lack of long-term economic fibre supply. The mill's last day of operation will be early next
month, and we are focused on placing employees at other Canfor divisions and safely winding down
the operations.
In regards to Canfor Pulp, there was a modest increase in NBSK pulp shipments compared
to the last quarter owing to fewer maintenance outages and improved mill productivity, including a
Kraft mill setting a new monthly production record in August. Global list prices were down in the
quarter, but these were outweighed by the weaker Canadian dollar.
Lumber markets continued to face challenges in Q3, with our Lumber segment reporting a
small operating loss of $1 million after onetime items. Prices are starting to recover, as expected, and
we've seen positive appreciation, particularly in both yellow pine and SPF price levels.
China volume experienced a slowdown in September and October, particularly low grade;
however, high grades were more solid.
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During the third quarter, Canfor announced the acquisition of Anthony Forest Products,
which operates six facilities, producing lumber, engineered wood products, wood chips with a
combined capacity of approximately 250 million board feet. This reflects a continuation of our
strategy to grow our operations in strong, sustainable, high quality fibre regions.
With those introductory remarks, I will now turn the call over to Alan Nicholl to provide
more details on Canfor and Canfor Pulp's financial results for the quarter.
Alan Nicholl — Senior Vice President, Finance and Chief Financial Officer, Canfor Corporation
Thank you, Don, and good morning to everyone. My comments this morning will focus
principally on our financial performance for the third quarter of 2015 by reference to the previous
quarter. Full details of our results are contained in the Canfor Pulp and Canfor news releases, both of
which were issued yesterday. And as always, you'll find an overview slide presentation on both the
Canfor and Canfor Pulp websites in the Investor Relations section under webcasts. The presentation
highlights consolidated and segmented results, and I'll be referring to this presentation during my
comments.
For the third quarter of 2015, Canfor reported a shareholder net loss of $17 million or $0.13
a share, down from net income of $11 million or $0.08 a share reported for the second quarter, and
down from $46 million or $0.34 a share reported for the third quarter of 2014.
On Slide 3 of our presentation, we highlight various non-operating items, net of tax, and
non-controlling interest, which affect the comparability of our results between the quarters. In the
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third quarter of 2015, negative market-to-market adjustments on derivative instruments had an
impact of approximately $9 million or $0.07 a share, and onetime costs related to the announced
permanent closure of the Canal Flats Sawmill had an impact of $14 million or $0.11 a share.
After taking an account of these adjustments, the third quarter adjusted shareholder net
income was $6 million or $0.05 a share compared to a similarly adjusted net loss of $2 million or $0.02
a share for the second quarter of 2015.
You'll note on Slide 4 of our presentation that Canfor's third quarter operating income was
$9 million, which represented a decrease of 9 million from the previous quarter.
Operating income in the third quarter include onetime costs of $19 million for the
aforementioned Canal Flats closure. Excluding this provision, operating income was up $10 million
versus the second quarter, largely reflecting improved Pulp and Paper segment results, which more
than offset a decline in the Company's Lumber segment earnings.
Results for the Lumber segment are highlighted on Slide 5 of our presentation. After
adjusting for the Canal Flats closure provision as well as an inventory evaluation adjustment of $6
million, the Lumber segment recorded a small operating loss of $1 million, down from operating
income of $5 million reported for the previous quarter. The decrease primarily reflected lower US
dollar southern yellow pine lumber sales realizations.
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October 29, 2015 — 11:00 a.m. E.T.
Western SPF bench mark prices were generally in line with the second quarter reflecting a
6 percent weaker Canadian dollar, which offset weaker low-grade prices and to a lesser extent, higher
average export taxes over the quarter.
Total lumber production was down by 3 percent from the previous quarter, with
productivity gains partly offsetting the impact of additional staff holidays in Canada and shift
configuration changes at certain western SPF operations.
Overall, unit manufacturing costs were lower than the previous quarter with the
productivity improvements and seasonally lower energy costs positively impacting operating costs in
the third quarter. Lumber shipments were down 2 percent quarter over quarter.
Canfor's Pulp and Paper segment comprises the results of Canfor Pulp Products Inc. As you
will see on Slide 6 of our presentation, Canfor Pulp reported net income of $31 million or $0.45 a
share compared to net income of $15 million or $0.25 a share for the second quarter, a net income
of $24 million or $0.34 a share for the third quarter of 2014.
Canfor Pulp's third quarter net income, after taking account of losses on financial
derivatives, was $35 million or $0.50 a share, and this represented a $22 million or $0.32 a share
increase from adjusted net income of $13 million or $0.18 a share for the second quarter.
As you'll see on Slide 7, Canfor Pulp's results reflected fewer maintenance outages and
improved productivity as well as a modest increase in NBSK pulp sales realizations that reflected the
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6 percent weaker Canadian dollar, which outweighed a small decrease in US dollar list prices. And as
Don noted, the Kraft pulp mill set a new monthly production record in August.
The weaker Canadian dollar also had a positive impact on the paper operation results, which
also benefitted from a 12 percent increase in production, as the paper mill returned to more
normalized production levels following its own scheduled maintenance outage in the second quarter.
Capital spending in the third quarter totalled $61 million, of which $43 million was for the
Lumber business and $15 million for Canfor Pulp. 2015 total capital spend is currently projected to be
around $170 million for Canfor and $60 million for Canfor Pulp.
During the third quarter, Canfor announced the acquisition of Anthony Forest Products for
a purchase price of US$93.5 million, including approximately $15 million of working capital. The
transaction is scheduled to close in the next week.
Around quarter-end, Canfor also completed several financings and refinancings, including
the issuance of a new US$100 million nine-year term loan with Prudential Capital and a new US$100
million eight-year term loan commitment. These financings both strengthen our liquidity and support
our growth in the US South.
During the third quarter, Canfor Pulp paid a special dividend of $1.125 per share as well as
a quarterly dividend of $0.0625 per share, resulting in total distributions to Canfor Pulp shareholders
of $83 million. Also during the third quarter, Canfor Pulp repurchased approximately 557,000 of its
common shares at an average price of $12.38 per share for a total of $7 million. And yesterday, the
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Canfor Pulp Board announced the continuation of its $0.0625 dividend payment per share for the
quarter.
At the end of Q3, Canfor, excluding Canfor Pulp, had net debt of $260 million with available
liquidity of 149 million before taking account of the aforementioned US dollar financings.
Canfor Pulp had net debt of $33 million with available liquidity of 117 million. Net debt to
total capitalization, excluding Canfor Pulp, was 16 percent; for Canfor Pulp it was 7 percent; and on a
consolidated basis, it was 15 percent.
And with that, Don, I'll turn the call back over to you.
Don Kayne
All right. Thanks very much, Alan. So, Operator, we’ll now go ahead and take questions.
Q&A
Operator
Thank you. We will now take questions from financial analysts. If you have a question, please
press *, 1 on your telephone keypad. If you are using a speakerphone, please lift your receiver and
then press *, 1. If at any time you wish to cancel your question, please press *, 2. Please press *, 1
now if you have a question. There will be a brief pause while participants register for questions. Thank
you for your patience.
Your first question comes from Sean Steuart of TD Securities. Please go ahead.
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October 29, 2015 — 11:00 a.m. E.T.
Sean Steuart — TD Securities
Thanks. Good morning, everyone. Couple of questions on capital allocation with respect to
both companies, I guess starting with Canfor Corp. On a pro forma basis for the Anthony Forest
Products acquisition and backing out Canfor Pulp, I would get your pro forma net debt to cap up
around 30 percent, maybe a little bit higher. I guess just general thoughts on comfort with leverage
at the Canfor Corp. level and your thoughts on additional room for incremental sawmill acquisitions
from here.
Alan Nicholl
Yeah. Good morning, Sean. So to your point on our pro forma debt, we come out actually
with a slightly lower number than I think you mention on a pro forma basis, but I think the point you
highlight is around our comfort on slightly higher debt to cap.
What I would say to you is that we remain very disciplined and very keen to stay with a very
conservative balance sheet and are very keen to make sure that we preserve that. So we're looking
into that very closely, and we're not concerned at all with this purchase and where it takes us. And as
we look out, actually, we see lots of room for further strengthening of our balance sheet without
jeopardizing our strategy and our key priorities.
Sean Steuart
Okay. And then on the Canfor Pulp level, notwithstanding I guess you're going to have more
downtime near term and that could pressure your cost structure, but we would see a transition back
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October 29, 2015 — 11:00 a.m. E.T.
to net cash at some point next year. Maybe just the bias for returning capital to shareholders, your
thoughts on that. You've been busy on the buyback, but beyond that, maybe talk about, I guess, your
thinking behind special dividends, which was your route you took in Q3, and how you’d weigh that
against something like a Dutch auction in terms of returning capital to shareholders.
Don Kayne
Alan, why don’t you go ahead and talk about that.
Alan Nicholl
No. Sure. For sure, Sean. So to try and answer the various questions you've put forward; so
I think just as a refresh, we did pay a total of $83 million, I think, in terms of total dividends, including
that special dividend, and it is important to emphasize that that was a onetime, kind of, special
dividend and was intentionally communicated as such. And also it reflected the absence of attractive
acquisition opportunities as well. So it was made after careful thought by the Board. And so we believe
it was well received, and we've heard very good feedback from our shareholder base with that in
mind.
To your point around our cash generally, for sure we're benefitting from strong operating
performance and a strong balance sheet. We are mindful that there does appear to be a little bit of
weakness in pulp markets, but notwithstanding, we still expect to have a fairly solid performance over
the next couple of quarters.
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October 29, 2015 — 11:00 a.m. E.T.
We’re very keen to pursue—keep that top quartile margin focus, Sean. We do like the share
buyback and the baseline dividend hybrid if you like, and as you will have noted, we spent about $7
million on share buybacks in the quarter. We’re keeping that going as well. So right now we’re feeling
pretty comfortable with that we’ve got the balance right, but for sure we need to revisit this
periodically, and we do so with the Board.
Sean Steuart
Okay. That’s all I have for now. I’ll get back in the queue. Thanks.
Operator
Thank you. Ladies and gentlemen, as a reminder, should you have any questions, please
press *, 1 on your phone. Thank you.
Your next question is from Paul Quinn, RBC Capital Markets. Please go ahead.
Paul Quinn — RBC Capital Markets
Yeah, maybe you could—sorry. Good morning, guys. Just a couple of quick questions; one
on Anthony Forest Products. Maybe you could just go through the mills that they’ve got. It looks like
there’s two sawmills, two engineered wood plants, two chip plants. Have I got that right?
Don Kayne
Yeah; one sawmill, two engineered wood plants, Paul, and two chip plants.
Paul Quinn
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October 29, 2015 — 11:00 a.m. E.T.
Okay. So you’ve got the 150 million at Urbana. Where’s the extra 100 million of lumber
capacity coming from?
Don Kayne
That’s coming from Urbana, in Arkansas, and then I also didn’t add there we’ve got a joint
venture in terms of an I-joist plant too up in Ontario with EACOM.
Paul Quinn
Okay. So I’m still confused because you’re got combined capacity at 250 million equivalent,
but then you’re talking about Urbana at 150. So the delta is 100. Where is that?
Don Kayne
That’s combined with the two engineered wood products plants and the OSB plant adjusted
into FBM because those products are cubic metres. The two engineered wood plants and the I-joist
plant combined are 100 million.
Paul Quinn
Oh, okay. I got it. I got it. Okay. And no OSB. Okay.
And then just looking at the lumber operations given the net loss in the quarter, and it looks
like that would be given—most of that would be in the US South. Why didn’t you take any associated
downtime in the quarter?
Don Kayne
In the south, Paul?
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October 29, 2015 — 11:00 a.m. E.T.
Paul Quinn
Yes.
Don Kayne
Primarily I guess, I mean, everybody does things for different reasons. We’ve had a—in
terms of no doubt the prices have come down there, but from our standpoint the mills that we have
operating down there are making a sufficient margin that we didn’t feel it was justified whatsoever.
Paul Quinn
Okay. And then just turning to the expiry of the softwood lumber; it seems like market prices
have come up, i.e. this wall of wood hasn’t really materialized; not that many expected it except for
a few traders, but what’s happening in terms of current negotiations, and what’s your outlook on that
file?
Don Kayne
In terms of softwood lumber file, I mean clearly we were working towards an extension as
you’re aware, but I think part of the issue there was, of course, with the Canadian election coming
up. And that caused some problems and probably was the main reason for not being able to get that
done. I think going forward, we’re fairly positive that we, over the next probably three to six months,
there’ll be some negotiations definitely underway after the election and the new Cabinet’s introduced
on November 4th.
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We would expect that that would start to begin fairly soon. I think there is some motivation
and some feelings from both sides I think that we would like to see a deal certainly during the stand
still period. So we remain somewhat optimistic there, but time will tell.
Paul Quinn
I know it’s early days in terms of the Liberal government, but do you see any change in
philosophy with respect to the SLA file on that change?
Don Kayne
I don’t think so. I think that whether it’s the Conservatives or the Liberals, I think they both
have a fairly good recognition, at least from what I’ve heard and we’ve heard, that they’re keen to
recognize that we need to get a deal done and get some certainty in markets and whatnot going
forward. So we don’t see it having any negative implications whatsoever.
Paul Quinn
Okay. And then just lastly, you know we were expecting actually really strong pulp results
last quarter. That didn’t happen, but they sure came through this quarter. Can you talk to the
productivity improvements at your mill system? And do you expect that to be ongoing at this level?
Don Kayne
Sure, Paul. Maybe I’ll let Brett talk about that.
Brett Robinson — President, Canfor Pulp Products Incorporated, Canfor Corporation
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October 29, 2015 — 11:00 a.m. E.T.
Yeah. Done a good job. We’ve put in place an initiative called AIM 88 (phon) over the last
couple of years focused on reliability. The guys are doing a tremendous amount of effort into training,
documentation, and building a strong approach to our maintenance outages as well as our area
shutdowns. It’s starting to show in reliability across the board as well as execution of our outages. So
yeah. We feel pretty good about our results there; our productivity, and I think going forward, we
should be able to continue to deliver that.
Paul Quinn
Great. That’s all I had. Thanks a lot, guys. Thanks.
Operator
Thank you. Your next question is from Daryl Swetlishoff from Raymond James. Please go
ahead.
Daryl Swetlishoff — Raymond James
Oh, thanks. Good morning, guys. Question for Wayne on just the low-grade lumber market.
How long do you think that this discount to the benchmark persists? And what will be the mechanisms
that will lead to low-grade pricing getting higher?
Wayne Guthrie — Senior Vice President, Sales and Marketing, Canfor Corporation
Good morning, Daryl. Well, who knows, right? It went a lot lower than any of us anticipated.
It is going back as you can see. It’s trending back towards normal. I think we’re seeing a little bit of an
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uptick in our volume for the November and December bookings into China, so that will help. It’s still
not back to normal but trending back towards normal.
The US absorption of the low grade, and you can see what’s happened with the prices in the
last four weeks, has been a lot better than we anticipated. So I think business there might have been
a bit better than we anticipated. So that’s helped. So I guess we got Chinese New Year. We got winter.
So it’s not going to happen overnight, but I would think in the next quarter or two we’ll see it trend
back towards normal.
Daryl Swetlishoff
Okay. That’s helpful. And Don, just as you look out over the next couple of years, you’ve
been concentrating, it appears, more in the US South for growth opportunities. Ultimately, I mean
assuming that you can find the right assets, what sort of proportion of the US South production would
Canfor liked to have in fullness of time?
Don Kayne
Thanks, Daryl. I think probably over the next five-year period, I mean clearly you know we
like being down in the South. We see the opportunity there to probably increase from where we are.
In terms of how much that will be in terms of order of magnitude, I think that’s a bit dynamic now.
But we wouldn’t be unhappy to see another 5 to 10 percent growth down there over time. But clearly
it just depends on what—we’re more interested in the quality of the growth than we are just growing
of course, and we’ve also got some equivalent opportunities, we think, down the road in terms of BC
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October 29, 2015 — 11:00 a.m. E.T.
as well. So just overall, I think that probably in the neighbourhood of 5 to 10 percent wouldn’t be out
of the question in longer term, but it’s more around the quality of the growth and the growth.
Daryl Swetlishoff
Okay. Thanks for that.
Operator
Thank you. There are no further questions at this time. I will now turn the conference back
over to Mr. Don Kayne.
Don Kayne
Thanks, Operator, and appreciate everybody participating on our call for Q3, and look
forward to talking to you next quarter. Thank you.
Operator
Thank you. Ladies and gentlemen, this concludes your conference. We thank you for
participating, and we ask that you please disconnect your lines.
*****
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